Fixed Income Cash Flows and Types

Question 2

What is a “Bullet Bond”?

Answer 2

A bond whose principal repayment is made entirely at maturity.

Question 3

What is amortizing debt?

Answer 3

A loan or bond with a payment schedule that calls for periodic payments of interest and repayments of principal.

Question 4

What is a “Fully-Amortizing Loan”?

Answer 4

A loan or bond with a payment schedule that calls for the complete repayment of principal over the instrument’s time to maturity.

Question 5

What is a “Balloon Payment”?

Answer 5

A large payment required at maturity to retire a bond’s outstanding principal amount.

Question 6

What is a “Partially-Amortizing” Bond?

Answer 6

A loan or bond with a payment schedule that calls for the complete repayment of principal over the instrument’s time to maturity.

Question 7

What are Mortgage-Backed Securities?

Answer 7

Debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property.

Question 8

What is a “Sinking Fund”?

Answer 8

Provisions that reduce the credit risk of a bond issuer by requiring the issuer to retire a portion of the bond’s outstanding principal each year.

Question 9

What are “Waterfall Structures”?

Answer 9

These represent the distribution order for cash flows and risk to different tranches in a financing structure.

Question 10

What are “Step-Up Bonds”?

Answer 10

Bonds for which the coupon, be it fixed or floating, increases by specified margins at specified dates.

Question 11

What are “Leveraged Loans”?

Answer 11

Loans made to a borrower or issuer with relatively lower credit quality and/or higher leverage.

Question 12

What are “Credit-Linked Notes”?

Answer 12

Bonds whose coupon changes when the bonds’ credit rating changes.

Question 13

What is a “Payment-in-kind”?

Answer 13

a bond feature whereby coupon payments can be fully or partially paid in the form of additional issuance or added to the principal amount.

Question 14

What are “Green Bonds”?

Answer 14

Bonds used in green finance whereby the proceeds are earmarked toward environmental-related products.

Question 15

What are “Index-Linked Bonds”?

Answer 15

A bond whose coupon payments or principal repayment is linked to a specific index.

Question 16

What are “Inflation-Linked Bonds”?

Answer 16

A type of index-linked bond that offers investors protection against inflation by linking the bonds’ coupon payments and/or the principal repayment to an index of consumer prices.

Also called “Linkers”

Question 17

What are “Treasury-Inflation-Protected Securities” (TIPS)?

Answer 17

A U.S. Treasury Bond with a principal that is adjusted for changes in the Consumer Price Index (CPI).

TIPS are typically issued in 5, 10, and 30year maturities.

Question 18

What is a “Capital-Indexed Bond”?

Answer 18

A type of index-linked bond for which changes in the index are captured with adjustments to the principal.

A common example is a TIP issued by the U.S. government.

Question 19

What is an “Interest-Indexed Bond”?

Answer 19

A type of index-linked bond for which changes in the index are captured with adjustments to interest payments.

Question 20

What are “Deferred Coupon Bonds”?

Answer 20

Bonds that pay no coupons for their first few years but then pay a higher coupon than they would otherwise normally for the remainder of their life.

Also called “Split Coupon Bonds”.

Question 21

What is a “Callable Bond”?

Answer 21

A bond containing an embedded call option that gives the issuer the right to buy the bond back from the investor at specified prices on predetermined dates.

Question 22

What is a “Fixed-Price Call”?

Answer 22

A contingency provision that grants an issuer the right to buy back a bond at a predetermined price in the future.

Question 23

What is the “Call protection period”?

Answer 23

The time during which the issuer of a callable bond is not allowed to exercise the call option.

Question 24

What is a “Call Period”?

Answer 24

The time during which the issuer of a callable bond can exercise the call option.

Question 25

What is the “Call Price”?

Answer 25

The price at which the issuer of a callable bond has the right to purchase the bond from investors.

Question 26

What is “Call Risk”?

Answer 26

The uncertain maturity and limited price appreciation associated with callable bonds.

Question 27

What are “Putable Bonds”

Answer 27

Bonds that give the bondholder the right to sell the bond back to the issuer at a predetermined price on specified dates.

Question 28

What is a “Convertible Bond”?

Answer 28

A bond that gives the bondholder the right to exchange a bond for a specified number of common shares in the issuing company.

Question 29

What is a “Conversion Price”?

Answer 29

For a convertible bond, the price per share at which the bond can be converted into shares.

Question 30

What is a “Conversion Ratio”?

Answer 30

For a convertible bond, the number of common shares that each bond can be converted into.

Question 31

What is “Conversion Value”?

Answer 31

For a convertible bond, the value of the bond if it was converted at the market price of the shares.

Also called “Parity Value”

Question 32

What is a “Warrant”?

Answer 32

An attached option that gives its holder the right to buy the underlying stock of the issuing company at a fixed exercise price until the expiration date.

Question 33

What are “Contingent Convertible Bonds”

Answer 33

Bonds that are automatically converted to equity if a specific event or circumstance occurs; such as the issuer’s equity capital falling bellow the minimum requirement set by regulators.

Question 34

What are “Domestic Bonds”?

Answer 34

A type of bond for which the issuer’s domicile and jurisdiction of issuance are the same.

Question 35

What are “Foreign Bonds”?

Answer 35

A type of bond for which the issuer’s domicile and jurisdiction of issuance are different.

Question 36

What are Eurobonds?

Answer 36

A type of bond issued internationally, outside of the jurisdiction of the country in whose currency the bond is denominated.

Question 37

What are “Bearer Bonds”?

Answer 37

Bonds for which ownership is not recorded; only the clearing system knows who the bond owner is.

Question 38

What are “Registered Bonds”?

Answer 38

Bonds for which ownership is recorded by either name or serial entity.